Tofas Turk Otomobil Fabrikasi AS

IST:TOASO.E

Earnings Call Transcript 2021-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. I'm Costantino, your Chorus Call operator. Welcome, and thank you for joining the Tofas Türk Otomobil Fabrikasi A.S. conference call and live webcast to present and discuss the fourth quarter 2021 financial results.

At this time, I would like to turn the conference over to Mr. Cengiz Eroldu, CEO; Mr. Fabrizio Renzi, CFO; Mr. Mehmet Agyüz, CFA and Investor Relations Manager. Mr. Renzi, you may now proceed.

[Fabrizio Renzi, executive]

Good afternoon. Thank you, operator. Thank you all for joining the call today. Before to start the presentation, I would like to share the key highlights of the year 2021. In spite of the difficult operational condition, we achieved an outstanding financial result with a PBT growing by 92% and reaching a margin of 11.8%, well above our previous guidance.

We closed the year with the best result over the last few decades, not only in Turkish lira terms, but also in euro terms and dollar terms. The main driver of the excellent result is the good performance of the domestic market, where we have increased our profitability, thanks to the favorable channel mix, price positioning and thanks to the contribution of the new version Egea Cross.

Regarding the -- with 122,000 units sold, we are the leader of the Turkish market. And our Egea model remained by far the best-selling car for the fifth consecutive year.

Regarding the Egea family program, we are very satisfied, but we continue to invest, and we want to reinforce our leadership position in 2022 with the launch of the new automatic transmission version.

Regarding the exports, we are following the rebound of the European market in the LCV segment, while the passenger car segment in Europe remained weak and our performance has been affected by the microchip shortage. Nevertheless, we are planning to recover position in 2022, thanks to the introduction of new versions.

Regarding export, it's important to remark that our export business model remained very solid. And the year 2021 with the semiconductor crisis and the year 2020 with a pandemic emergency have shown our strong resilience.

Finally, Stellantis. In the recent months, Stellantis presented at the electrification and software strategy of the group. We are pleased to be part of this ambitious program with our skilled people and our competitive cost position.

In this regard, in Tofas, we are ready to exploit all the potential opportunity. Now I invite Mehmet to proceed with the presentation, and then we can take your question in the Q&A session. Thank you.

[Mehmet Agyüz, executive]

Hi. Good morning and good afternoon, everybody. In 2021, Turkish automotive production was down by 2%, reaching to 1.3 million units, while in the fourth quarter, the decline was around 20% compared to the previous year.

At Tofas, we constitute around 18% of the total industry production with a production level of close to 230,000 units, which was around 9% lower compared to the previous year.

In terms of production mix, we allocated 53% of our capacity to passenger car. This suggests that -- and on LCV side, that was around 47% allocation, which is sizably above the previous year.

So our shipments. In parallel to our production performance, our shipments were down around 10% compared to the previous year at around 235,000 units. Various domestic shipments declined by 14%, and our export shipments were around 5% lower.

Despite the ongoing procurement challenges on the ongoing global microchip shortage, we observed a sizable recovery on a sequential basis in our volumes, which reached around 63,000 units and suggesting around 42% expansion compared to the previous quarter in the fourth quarter of the year.

Despite this, our total shipments in the fourth quarter was down around 32%, and this is due to the combination of our domestic and export business on a more equal way.

Our shipment volumes remains to be -- we have a balanced business, which LCV shipments constitutes around 48% of our total shipments and PC constructs around 52% of our overall total shipments. On the other hand, we observed a notable shift in our export business, whereas LCV shipments was around 59% of our business. This suggests around 11 percentage point increase compared to the previous year.

Moving on to domestic markets. In 2021, domestic light vehicle markets was slightly down around 5% to slightly below 740,000 units. And this was mainly due to decline in the passenger car shipments, which was down around 8%. On the other hand, this was partly compensated by 8% growth in the LCV business.

Looking at monthly evolution of the light vehicle retail sales in Turkey, you can see the one main pattern is the strong growth in the first half of the year, returned to negative growth in the second half of the year. There are 2 reasons for this; #1, growing issues with the microchip shortage has impacted the situation, and this is not part of the overall decline in the demand environment. And secondly, obviously, the high base effect of the previous year in the second half of the year.

Nevertheless, it's important to stress that the supply-demand mismatch creates notable pent-up demand in the market, which we weren't able to satisfy, especially in the second half of last year. We expect this to partially offset the potential negative consequences of the macro volatility that we observed in Turkey towards the end of the year.

At Tofas, our shipments were around 12% lower compared to the previous year, reaching 225,000 units. And our LCV business performed [indiscernible] to the market, which was up by around 7%. On the other hand, our passenger car shipments were 21% lower compared to the previous year. It's important here is that compared to the prepandemic level, our shipment growth is still at 59% and higher than the overall market growth.

Nevertheless, our passenger car shipments were impacted by the -- some of the gaps in our product portfolio, which we are trying to address this year.

Looking at the monthly evolution of our domestic light vehicle sales, it's a similar pattern to the underlying demand. As you can see here is the strong growth in the first half of the year returned to negative territory in the second half of the year due to the similar reasons I mentioned for the overall light vehicle demand in Turkey.

Looking into our market position in Turkey. In passenger car markets, we maintained our #2 position with a 13.1% market share. As you know -- you may remember that the launch of the crossover model has helped this performance despite the gaps in our product portfolio as due to the phasing of the new facelifted versions of our passenger car family, we temporarily did not have an automatic transmission offering in the market last year.

Essentially, we attained this market share by only serving a 1/4 of the market and with addressing this issue, we are expecting to notably improve our competitive position in the market.

On the LCV side, we maintained our market share with around 27.4% compared to the previous year, but well above the pre-pandemic levels, so which we benefited last year during the COVID. And in 2021, we were able to hold down to those gains, which is quite an important accomplishment. And also in fourth quarter, we had a very strong momentum in our LCV business, with the fourth quarter LCV market share of around 32%.

And despite the better availability of the imported vehicles, this market share is around 600 basis points higher than the pre-pandemic level in 2019. So overall, we maintain our comfortable market leadership in the light vehicle market in Turkey with a 16.4%, widening the gap against the closest competitor.

And this remains well above the pre-pandemic level. Including the premium brands, Tofas market share stands at around 16.9% in 2021.

Moving on to export business. There was a mixed demand environment in EU last year, throughout the year actually, similar to Turkey. In the first half, strong registrations. In the second half, there was a notable slowdown due to the supply constraints as well as the -- with the new variants of the COVID impacting the overall consumer sentiment.

With that passenger car registrations were 2% lower in 2021. Despite the fact that in the first half, there was a very strong growth. And on the other hand, this creates a big opportunity for growth as when we compare to pre-pandemic levels, passenger car demand is around 26% below the 2019 level.

On the other hand, LCV market was a bright spot with a 11% registration growth in EU. And this is also a similar trend. There is some deceleration in the second half of the year due to the same reasons. Despite the fact that LCV demand has been recovering, it still remains around 10% below the pre-pandemic levels.

At Tofas, our export shipments were around 5% lower compared to the previous year at around 112,000 units. We outperformed the market on the LCV business, which grew by around 18%. On the other hand, our PC shipments were 25% lower compared to the previous year.

One phenomena in EU is the growing penetration of the electric and hybrid, mainly hybrid vehicles in the market, which is last year around 45% of the overall passenger car registrations in EU. Obviously, this created some gap in our portfolio as we did not have that offering, but we are planning also to close that gap this year, which will improve our position in those markets as well.

Looking into our export volumes on a monthly basis, of course, this fluctuates based on the progress in the also COVID variant as well as the supply issues, but you can see that also we -- our export shipments starts to recover in December as well. In January, we had a distant export performance, which grew by around 10% at the beginning of the year.

Looking into our end markets in terms of our export business. Italy remains our most important market with a slightly growing share at 34% of our export business. And the other important market for us is the MENA region, as we have been highlighting. Its share has reached to almost 19% of our export business, which is around 600 basis points higher compared to the previous year, and it has been growing. And in the future also, we are expecting this MENA region to increase, which as we further leverage the strong distribution network of Stellantis in this area.

Looking into our shipments by model. Overall, on the export side, we shipped around 5,400 less units. Very strong performance of our LCV shipments, which combined shipped around 10,000 units more compared to the previous year. On the other hand, this was offset by the decline in our main hatchback and station wagon models for the -- which has been impacted due to the -- some of the variants get in our portfolio.

On the other hand, on the domestic market, we shipped around 9,000 units less at 122,000 units. And here, despite the almost end of its life cycle, Doblo continues to perform very strongly, which we shipped 5,000 units more. On the other hand, the Sedan's performance, despite being market leaders due to the supply constraints as well as the lack of automatic transmission, this was around 30,000 less.

One important highlight of this slide is the penetration of crossover version. We are seeing a very strong interest by the consumers, very strong penetration, as 1/3 of -- almost 1/3 of our passenger car shipments were from this version. And with the introduction of new variants, we are expecting this strong performance to continue.

On the imported vehicles, we shipped around 4,000 units less -- and due to the obvious reasons for the supply constraints, this impacted our volumes on that side. So overall, we shipped around 25,000 units less with a total shipment of 235,000 units in 2021.

Moving on to financial performance. Overall, a 10% decline in our shipments translated into 26% growth in our revenues. This is essentially a reflection of our very disciplined pricing in the domestic markets, reflecting the impact of the weaker lira to our prices as well as our cost-plus export contracts.

On the EBITDA front, it surged by around almost doubled to TRY 5.8 billion. And PBT, profit before tax, our main KPI, also grew in parallel to the EBITDA and reaching to slightly above TRY 3.5 billion last year. So 26% revenue growth, we observed, was driven by balanced combination of our domestic and export business.

Domestic business grew by 20%, slightly above that, and export business also slightly above 30%, reaching a turnover of overall consolidated TRY 30 billion in 2021. When we look into the fourth quarter alone, we resumed growth with a 10% revenue growth, equal -- as a balanced combination of the domestic and export business.

As you may recall that this last quarter, there was a contraction of around 18% on a year-over-year basis. So essentially, strong pricing from -- offset it, we can say the lower shipment volumes from the production constraint. So our profitability was very robust in 2021. As you can see, our gross margin expanded by around 600 basis points to slightly below 20%.

And a couple of main reasons is -- the most important one is our performance in the local market, very strong execution with strong pricing as well as the cost control and channel mix impacted this strong improvement in our local profitability.

And the second factor is our protective cost-plus export contract is also supportive for this performance. In parallel to the gross margin improvement, EBITDA margin also expanded by 670 basis points, also slightly below 20%. And also PBT, which grew by 92% for the full year with a PBT margin of 11.8%, which is 400 basis points better compared to previous year and notably above our previous sustainable PBT margin.

Our net profit margin also expanded by 350 basis points for the full year with a net profit of TRY 3.3 billion. And this is partly diluted by the higher tax expense, which we -- in the fourth quarter, which we recognized. But nevertheless, in the fourth quarter, bottom line growth accelerated to 90% with a net profit of TRY 1.2 billion, and the net margin also was above 12%, which is substantially better compared to the previous year.

So here is a snapshot of our P&L and actually shows the resilience of our business model with 26% top line growth, translating into very strong figures at the operating and the bottom line level.

Our balance sheet as of year-end remains quite robust. And as of year-end, our cash and cash equivalents were almost flat compared to the previous year despite a TRY 1.5 billion of dividend payout as well as close to EUR 100 million of CapEx spending. Thanks to very strong cash generation, our cash position remains similar.

The inventories were up by around TRY 855 million. This is mainly due to the depreciation of Turkish lira. And on a net basis, trade receivables and trade payables, it did not move much as the increase in trade receivables was mostly compensated by the increase on the payables. So we had a decent net working capital management throughout the year.

So as a result, our shareholder equity grew close to 30% standing to TRY 5.7 billion as of year-end. Our financial position has also improved with EUR 91 million, which suggests a sequential as well as a year-over-year improvement. And on the net working capital side, we are running quite a tight ship with a EUR 5 million of net working capital. And as you know that we have been operating close to these levels and it's expected to remain so in the foreseeable future.

Moving on to our CapEx. We spent around EUR 100 million in 2021, bulk of which was comprised of our upgrade investment for our passenger car family, which is almost completed and the remainder was [indiscernible] between prolongation -- related with the prolongation of Doblo as well as you can see the structural investments of EUR 10 million, which is expected to remain close to these levels in the foreseeable future as well.

Moving on to our outlook. Following a slight retreat in the domestic light vehicle market, we are looking for a flat market in 2022, with around 700,000 to 750,000 units. On the other hand, we are looking for a better performance in our domestic retail sales with an expected growth of flat to 12% growth in our volumes due to our expectation in our -- expansion in our passenger car market share.

On the export shipment side, we are looking for a slightly better recovery with around 5% to 18% growth in our export volumes to 125,000 to 140,000 units. And as a result, we are looking for a production of 240,000 to 270,000 units for this year.

And our CapEx is expected to remain similar despite the fact that we almost completed the passenger car upgrade, we are expecting to spend around EUR 100 million for 2022. And this concludes my presentation, and we are happy to take your questions. Operator?

[Operator]

The first question is from the line of Lanka, Sashank with Bank of America Merrill Lynch.

[Sashank Lanka, analyst]

I have 3 questions, if I may? The first question is, are you updating your PBT margin guidance, given what we saw this year? I think the previous guidance you gave us was around 8%, if I'm not wrong. The second question is on your volumes expectations for both the domestic and the export shipments.

You are expecting a pickup in both of them year-on-year. So what is the downside risk to this? And what is the assumption that you're having on the return of the semiconductor chips and the shortage being solved? That's the second question.

And the third question is, I think Stellantis has their strategy update in March, so should we expect an update from your side as well at that time?

[Fabrizio Renzi, executive]

Fabrizio Renzi speaking. Thank you for your question. Let me start from the PBT. As you have seen from the presentation, we achieved an outstanding level, 11.8%, well above our previous guidance of 8%. Of course, this unbelievable result is the combination of different factors. Some of them are, we can consider, permanent. So we will carry on these. Some of them it's temporary. So for sure, we can consider that now the level of profitability of the local market is much better than the previous years.

So we can consider this part, we can expect similar or we are targeting similar performance in the future. Second factor is the take-or-pay, take-or-pa is there. So in case of drop of the volumes, we will have this protection. We had this protection in 2021, in 2020. So no doubt about the protection of the export volumes.

And we had also another factor in December -- and November and December, that is the strong devaluation of the Turkish lira that support this unbelievable results. So this is the reason why in the full year, but also in the last quarter, we achieved this very good results.

In terms of future expectations, yes, you're right. We are revising our sustainable level of PBT. From now on, our target will be 2-digit target. So this is what we are planning for the next year in terms of PBT guidance. This was the first question.

About the volumes 2022. In this moment in the guidance that we released, we prefer as usual, to have a very, very conservative approach, both in local market and exports. In the local market, we have 2 main risk that are in our guidance, in our expectation of the industry for 2022. First of all, the macroeconomic's evolution, so the inflation, the trend of the currency, but on top of that, the increase of the cost due to the commodity is something that could affect the market. We have seen the market in January, losing around more than 10%. So this is the reason why we are very conservative.

And this is our concern from the point of view of the demand, commercial demand and customer. Remain also some concern in terms of production capability. So the microchips, electronics crisis is not finished yet. In the first quarter, we are experiencing more or less the same problem we had in the second half 2021.

So as a combination of some potential risk in the demand and some potential risk in the production capability [ at ] the shortage of the electronics component. For the moment, this 770 -- 750,000 cars for 2022 is our guidance. So to summarize, imply some risk in terms of demand and production capability.

Last question was related to Stellantis. As you maybe know, 1st of March will be presented the strategy for the coming years from Stellantis in the Capital Market Day. Of course, we are already working with Stellantis in some projects and some -- in a multiple scenarios.

So for the moment, what I can say is that we are in line. We are cooperating with Stellantis for their electrification strategy also for their software strategy. I can measure that with our R&D center, for example, we are working already in this strategy to reinforce the skill of the company for the future development of the software skills in the company.

So for the moment, this is -- that's all. We don't have any news in this moment that we can officialize in terms of future product plan, but we are working on multiple scenarios. This is the question, and this is what we can share with you today.

[Sashank Lanka, analyst]

If I can just follow up on the PBT margin guidance? You mentioned double digit, I think you did 11.1% in 2021. So I guess given you're expecting volumes to be higher and also the fact that there could be some inflationary and depreciation of the currency impact, should we assume that it should be ideally higher than this 11% and maybe close to mid-teens in terms of percentage or is that a very bullish assumption?

[Fabrizio Renzi, executive]

Okay. I repeat what I mentioned before. So we need to differentiate the permanent effect and what I mentioned temporary effects. In this moment, I cannot guess if the temporary effect will be present again in the future. So for the moment, I confirm what I said before.

So the target is double digits, then it depends on which will be the environmental condition, the macroeconomic condition, the export and so on.

[Operator]

The next question is from the line of Demirtas, Cemal with Ata Invest.

[Cemal Demirtas, analyst]

My first question is about the margin side. When we look at the fourth quarter and when I look at details of the FX sides, the gains on the cash flow hedges below the net income line, in the total comprehensive income side, I see around TRY 500 million FX losses from hedges. Could we assume that, that [ ran ] through the balance sheet and that just had a positive impact on your EBITDA figure?

So could we make adjustments to just differentiate FX sides from your EBITDA figure through making such an adjustment to understand the FX impact of that margin expansion? That's my first question.

So directly, I'm trying to understand what's your -- what was the effect of the currency -- steep currency movement on your EBITDA margin? That's my first question. And the other question is about the domestic market side. The picture was mixed last year and partially, it was related to chip and partially, it was maybe related to demand.

But as far as I see, demand was stronger. How do you see the outlook at least for the first half of the year? We know your full year perspective, but how do you see the first half of the year with the current prices and the conditions?

[Cengiz Eroldu, executive]

Hi. This is Cengiz. Thank you for the questions, Cemal. So the second -- I would like to start from the second one. So for the domestic market, actually, we are waiting not -- there is a very strong demand in the market overall. But what we see there is the attention for our affordable product range.

For this reason, we also -- we also strongly believe if we can handle the semiconductor shortage issues, we can also outperform in the first quarter. Your first question regarding the hedge accounting application is -- so in a simple way, hedge accounting is a correction of the depreciation because we are carrying our fixed assets in the Turkish lira terms since long years.

And there is a huge, let's say, difference between today euro and the 7, 8, 10 years before euro. And we are making this kind of correction on the depreciation and what we are reflecting on our transfer prices with the mechanism of hedge accounting.

So for this reason, we also, in the past meetings, always discussed that the EBITDA margin is not representative margin for the country due to the Turkish lira bookkeeping reality. So I don't -- it's a little bit complex issue, but I think this is the only explanation of what's happening.

[Cemal Demirtas, analyst]

Yes. Maybe Cengiz bey, I'm trying to understand is, in our minds, always there's a sustainable EBITDA margin under normal conditions. So just as I see this very, very high numbers, I'm trying to understand -- you gave some indication about the profit before tax, say, the double digit. I understand that. So just -- I just want to be able to compare what could be the sustainable level for that? Though you said that it shouldn't be a reference.

[Cengiz Eroldu, executive]

[ It's not that easy ] because there is 50% of the devaluation in 1 week -- because this is -- this also created this big, let's say, fluctuation in our side between the OP EBITDA and the PBT numbers, unfortunately, [ margins ] effect. But it's important that the company has a strong PBT, good double digit. And as Fabrizio explained at the beginning, this is also thanks to weak Turkish lira partially, which is a temporary.

So for this is -- this kind of high PBT also is not sustainable. But now as a management, as Fabrizio said, we increased also our target to stay at a double-digit level.

[Cemal Demirtas, analyst]

Okay. And as a follow-up, Cengiz bey. What was the first impression of the Stellantis team visiting Turkey maybe site visits and et cetera? Could you share any anecdotal issues that's surprising for them about your plans? Because when we go there, we are always impressed, but I want to understand at least is the an initial expression. Could you share any critics or any feedback about your operations? Just an anecdotal thing.

[Cengiz Eroldu, executive]

What I can say that also for them was a surprise when they understood the level of the plan. Also, Mr. Tavares underlined different times also level of the energy and the commitment of the people working on the lines. So I think it was a completely positive visit. And also, we started to make the first benchmarks. And there also, we are seeing one of -- we are one of the best production center inside Stellantis, mainly in the European area. So that's also good for us.

[Operator]

The next question is from the line of Bespalov, Vladimir with VTB Capital.

[Vladimir Bespalov, analyst]

Congratulations on good numbers. I have a few. First will be maybe a short-term one. As far as I understand this extreme Turkish lira volatility created, I would say, tailwinds for your margins in the fourth quarter of last year. But now we have a different situation.

So like probably you had some costs in late 2021. But now the prices in Turkish lira terms on export markets are probably lower, given that the lira depreciated. And I don't know how this works on the domestic market, maybe you could provide some color on that, whether the prices in Turkish lira are lower on the domestic market as well?

So can we face the situation, one, for example, in the first quarter of this year, what helped you to increase margins in the fourth quarter will act in, I would say, reverse direction and put some pressure on margins like with some costs being higher and revenues and prices lower in Turkish lira terms? This is the first question.

The second question if I looked at this phrase in your presentation that Tofas is well positioned to serve multiple brands of Stellantis. So maybe you could provide some color on that, what kind of multiple brands you are talking about? And are we -- should we expect some changes in the model range and things like this?

And the third question is on Doblo and this project [indiscernible]. We discussed many times in the past that you need about 1 year to 1.5 years to launch the next-generation version of a product. So the current contract, as far as I understand, expires in 2022.

So now we have slightly less than 12 months. So that's -- could you update how you see this project and whether there will be another change of the deadline of this time line or whatever?

[Fabrizio Renzi, executive]

Okay. Hello, Vladimir. Let me start from the second. First of all, you mentioned Doblo. No final decision that's been taken. So when we say we are working on multiple scenario means that on the table now, there are different solutions and different brands in -- under investigation.

The good thing for us is that in every scenario, we are carry on. The target is to saturate the production in Borsa. And there is the objective of Stellantis to exploit the cost advantage in Turkey. So from this point of view, all the scenario that I confirm, multiple brands means that in the future, you will see not only Fiat produced in Borsa other brands.

But in every scenario, the target is to use the competitive cost advantage in Borsa and to saturate the plant. So this is the first message. At this stage, we are not in condition to share the product plan. What I can say is that our target is to approve all the future projects within this year and most probably the first product will be approved in the first semester or maybe before.

This could be a good news for all us. This is what we can share in this moment. So I confirm that it's a multi-brand project. I confirm that the approval will become -- within this year will be finalized. And most probably the first step will be -- and first semester or may be before. This is for [Audio Gap].

Okay. For the first, your question, if we can see the reverse effect of the fourth quarter in the first quarter 2022? I believe not. But let me explain a bit. So first of all, for export, our model is a cost plus. So we don't have the risk to have, let me say, we don't have the risk not to charge to the customer some costs, whatever is the cost. If the cost is commodity, if the cost is coming from the fluctuation of the currency.

When it comes to the local as well, everything depends from us, let me say, because we are able to adjust, let me say, our position -- pricing position every month. So for us, independently if the currency or the cost is going up and down, we follow the evolution of the cost in order to protect our profitability.

So all in all, I don't expect any reverse effect, if this is your doubts. I don't know if I answered your question, but I confirm that double digit is now our new target for the year, and we will try to achieve this target from the very beginning of the year. So.

[Operator]

The next question is from the line of Kilickiran, Hanzade with JPMorgan.

[Hanzade Kilickiran, analyst]

I do apologize, but I just want to clarify again, around the PBT margin guidance. And I want to just understand if I am on the right track. So when we look at your quarterly PBT margin evolution, the first half, we observed something around 200 bps expansion. And in the second half, [ partly ] in the fourth quarter, there was a substantial expansion, which I presume the currency move has a positive impact.

So is it -- I mean, and for the full year, you have around 400 bps expansion. So is it reasonable to assume that, that permanent cost savings achieved so far has something around 200 bps addition to your PBT margin? Because I think first half is a bit more reasonable period to, I mean, analyze the data because there wasn't much, I mean, demand weakness and also there wasn't much currency moves in the first half?

[Fabrizio Renzi, executive]

Okay. Hello, Hanzade. Okay. I believe that we are in the same page because I mentioned that the target now is 2 digits. And our previous guidance was 8%. You remember last year, we improved from 7% to 8%. So basically, what I said before means that the increase we are seeing in 2021 is 4%. We can consider that 2% is something that will be permanent and stable. So I confirm what you, let me say, what you said. And so we are in line with your understanding. So 2% is what we gain in terms of performance, if you want.

[Hanzade Kilickiran, analyst]

Okay. And the second question, I know this is not affecting the PBT, but it is important from our side on modeling because we have to put some EBITDA. I mean how much unit production cost increase do you expect in 2022, assuming that there won't be much more supply issues, I mean, maybe you did something on the budget?

[Mehmet Agyüz, executive]

Hanzade, this is Mehmet. Yes, there will be some increase from the higher commodity prices, which the full impact will be more visible this year. And there will be some increase. But at this stage, we cannot be able to share this figure.

[Operator]

The next question is a follow-up question from the line of Bespalov, Vladimir with VTB Capital.

[Vladimir Bespalov, analyst]

It's quite a specific one. You mentioned that Tofas would be a software development center [indiscernible] for Stellantis. So my question is there is a huge competition for talent. And like there is a shortage of software engineers. So how you handle this issue? And are there enough software engineers available to serve as such a software development center?

[Cengiz Eroldu, executive]

Thank you for the question. This is really one of the toughest issues, but we are increasing our collaboration with the -- with a couple of universities, important universities in Turkey in order to have the better internship and after the recruitment. So we would invest much on this kind of relations in order to find the right talent also in the right quantity because also we have the ambitions in order to increase the software capacity in Turkey, and we see an opportunity there.

But of course, it's not easy. Your question also is a correct question. But we are aware, and we are working, as I said, with a couple of universities in order to increase their internship programs and recruitments from them. Thank you.

[Operator]

There are no further audio questions at this time. And we will now move to our webcast questions. Our first webcast question is from Mehmet Mumcu with OYAK Securities. And I quote, "Congratulations for the laudable 2021 results. I was just wondering how do you build your take-or-pay receivables. When invoicing receivables arising from a take-or-pay agreement, are they invoiced at the end of the period as bulk? If so, how much do you think the one-off impact of this situation on gross profitability is since the euro to Turkish lira rate is at its [ ATH ] at this year's billing date?"

[Mehmet Agyüz, executive]

Hi. This is Mehmet, again. Thank you for the question. We are -- how we account for the financials that we go with the accrual. So it doesn't go -- that, of course, we are not -- we are paid at certain periods for the take-or-pay throughout the year. And -- but we know how much we will be generating because of our take-or-pay contracts. So we go with the accruals. So the level of the currency at a certain period that we built is not very -- it doesn't have much of an impact on our financials.

If you are referring to the question about when do you bill and when you receive the cash between the time period between the 2, if there's any currency movement between those 2, either a devaluation or appreciation, it will be recorded under other income as an FX income or FX also, it doesn't really impact our EBITDA that we report on an operational level.

[Operator]

The next question is a follow-up question from Mehmet Mumcu with OYAK Securities. And I quote, "We see that your working capital requirement is growing compared to pre-pandemic level. In this regard, what will be your inventory policy for the upcoming quarters? Please give some color both for under the situation of semiconductor shortage and under normal circumstances."

[Mehmet Agyüz, executive]

Thank you for the question, again. As you know, we have been operating with very limited net working capital, which was -- last year due to COVID, it was distorted slightly. And of course, we maintain our policy to remain neutral to close to 0 on net working capital management. Of course, outside external conditions can cause some deviation from this.

But nevertheless, if you are referring to the specific inventory level, it is dependent on the -- as you know, the situation in the market is lack of availability. So we are running with limited availability. But on the other hand, there is an obvious currency impact on our inventory. So rather than going into those in detail, on a normalized level, you should assume we stick to our policy to maintain our net working capital that's relatively low levels.

[Operator]

The next question is from Alper Özdemir with Azimut, and I quote "Should we expect a similar dividend payout proposal to the Board versus last year considering a flat CapEx target and an improved leverage position?"

[Fabrizio Renzi, executive]

Thank you for the question. Yes, it is technically reasonable to expect a similar payout given the robust free cash flow generation and this year, probably the potential CapEx cycle will likely mainly be felt next year. So this year, we are in a quite a comfortable position to be able to propose a similar payout. But of course, it's up to shareholders to decide.

[Operator]

Next webcast question is from Alper Özdemir with Azimut, and I quote "Should we expect a similar dividend payout proposal to the Board versus last year considering a flat CapEx target and an improved leverage position?"

[Fabrizio Renzi, executive]

I think we answered this question. Next, please.

[Operator]

Next one is from [ Burak Salman ] with [indiscernible], and I quote, "Could you give us some color on payout ratio from our 2021 earnings, please?"

[Fabrizio Renzi, executive]

Yes. This has been addressed as well. Any other question?

[Operator]

There are no further audio or webcast questions at this time. I will now turn the conference over to Mr. Renzi for any closing comments.

[Fabrizio Renzi, executive]

Thank you, operator. I would like to thank you all the participants for the interest on Tofas. I wish you all a good day, a good weekend.